Capital Gains Taxes and the Surviving Spouse
A friend of mine in West Portal (who always reads my newsletters!) asked me a question yesterday about Capital Gains Taxes and how that relates to her mother's home, her mother's deceased husband (passed away in 2008), and the 2 and 5 year period. Once I had it all together I decided it was definitely worth sharing:
Individuals can exclude up to $250,000 in profit from the sale of a main home (or $500,000 for a married couple) as long as you have owned the home and lived in the home for a minimum of two of the last five years.
The 5 year period ends when the house is sold. In other words, in the 5 years prior to the sale of the house, the surviving spouse needs to have lived in the house for at least 24 months in that 5-year period. And the home must have been their principal residence. So the surviving spouse can take the $250K tax exemption. You cannot take the $250K exemption for the deceased husband (who passed away in 2008) - he does however have a huge impact on the current situation.
In determining the taxable amount for Capital Gains, you need to determine the "Cost Basis" of the home. Usually that is done as follows:
+ Purchase costs (title & escrow fees, real estate agent commissions, etc.)
+ Improvements (replacing the roof, new furnace, etc.)
+ Selling costs (title & escrow fees, real estate agent commissions, etc.)
- Accumulated depreciation (for example, if you ever took the office in the home deduction)
= Cost Basis
And then calculating your profit or loss would be:
Selling price - Cost Basis = Gain or Loss
However, for the surviving spouse in a Community Property State, the fair market value of the house at the time of the husband's death becomes the cost basis upon which the gain would be calculated.
To help you understand this a little better, I found the following from IRS Publication 523:
Surviving spouse. If you are a surviving spouse and you owned your home jointly, your basis in the home will change. The new basis for the half interest your spouse owned will be one-half of the fair market value on the date of death (or alternate valuation date). The basis in your half will remain one-half of the adjusted basis determined previously. Your new basis in the home is the total of these two amounts.
Your jointly owned home had an adjusted basis of $50,000 on the date of your spouse's death, and the fair market value on that date was $100,000. Your new basis in the home is $75,000 ($25,000 for one-half of the adjusted basis plus $50,000 for one-half of the fair market value).
Community property. In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), each spouse is usually considered to own half of the community property. When either spouse dies, the total fair market value of the community property generally becomes the basis of the entire property, including the part belonging to the surviving spouse. For this to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return.
For more information about community property, see Publication 555, Community Property.
**The information provided above is freely available on the Internet and at IRS.gov. It may or may not apply to your specific situation. As is always the case in any situation, I recommend that you consult with a Trusted Tax Professional.**
John M Scott, Broker / Owner, Century 21 Scott Keys Properties, Certified Distressed Property Expert (CDPE), Council of Real Estate Brokerage Managers (CRB), serving San Francisco and the surrounding San Francisco Bay Area